OMY to boost SS & Roth Conversion questions

[Luck_Club]

Woke up wondering about adding more work years to boost SS payment, and also considered Roth conversions. Anyone want to check the math and logic of my conclusions?

So as I ran the numbers I came up with the following. Basically every additional year of work would add approximately $60,000 in earnings to my 35 working years. When running through all the calculations it will add approximately $21 per month of Social Security income. Due to the self-employed nature of my earnings that will require me to pay $9180 in additional SS taxes & Medicare taxes @the full 15.3%, per year of working.

This would require a 36 year payback!

Ignoring the additional income I would receive during the OMY, am I missing something or is it dumb in my position to engage in OMY for SS benefit goosing?

On to Roth Conversions:

I've known for some time that as I reach 79.5 MRD, I'm going to have a tax issue. I'm going to owe a ton. This is a good problem to have, and surely beats the alternative. Having concluded from the above that OMY isn't worth it for goosing SS, I began noodling the logic of Roth Conversions prior to collecting SS. I'm anticipating about $60K a year in rental income, and may inherit some IRA's which will have RMD prior to 62 as well. This tax situation only gets worse as I hit age 72.5, any RMD on the inherited IRA's are going to be quite large, and have my own RMD's added into the mix.

In exploring Roth conversions, I come up with some immediate concerns:
1) Do you pay SS tax & Medicare taxes on the converted amounts?
2) After a conversion are you allowed to withdraw the converted funds penalty free? IE I take $100K from a IRA Pay $25K in tax, then a year, or some other time prior to age 59.5, pull out $75K tax free?
3) How do conversions vs straight IRA withdrawals impact SS income?


Due to family longevity, I'm leaning towards collecting SS @62, so I see about a 10 year window to do conversions with the least income impact. Not sure if I might change this for spousal survivor reasons in the future.

 

[pb4uski]

I concluded that the negligible impact of working additional years on my SS benefit were not worth it... when you already have enough freedom to have time to use the way you want is worth more than giving up $21/month... and I was only paying 1/2 of my SS.

There are no SS or Medicare taxes on Roth conversions. (In most cases, you have already paid SS and Medicare taxes on that income).

If you are under 59 1/2, there is a 5 year clock on each Roth conversion. If you are over 59 1/2, you can withdraw freely. Conversions and IRA withdrawals impact income the same... in both cases they are "pension" income on your tax return.

BTW, MRDs begin at 70 1/2, not 79.5 or 72.5... typos I suspect.

Roth conversions are very worthwhile before SS... particularly if your tax on the conversion is lower than your tax rate once SS starts... you are saving real $.

On the other... paying a ton of taxes once SS starts, I think of it this way... if my marginal tax rate on withdrawals/conversions is lower than when I deferred that income then I won.... if my marginal tax rate on withdrawals/conversions is higher than when I deferred that income then I have been more successful that I expected that I would be when I deferred the income so that is also a win... either way, I win.

 

[joeea]

Due to family longevity, I'm leaning towards collecting SS @62, so I see about a 10 year window to do conversions with the least income impact. Not sure if I might change this for spousal survivor reasons in the future.

For me, maximizing survivor benefits is one of the primary reasons for me to delay starting benefits to age 70.

I can't imagine doing any analysis of social security without considering that.

 

[CardsFan]

On the other... paying a ton of taxes once SS starts, I think of it this way... if my marginal tax rate on withdrawals/conversions is lower than when I deferred that income then I won.... if my marginal tax rate on withdrawals/conversions is higher than when I deferred that income then I have been more successful that I expected that I would be when I deferred the income so that is also a win... either way, I win.

My thoughts exactly!

I have no illusions about staying out of the 25% bracket when we hit RMD's, but we CAN convert and/or spend from the tIRA before then to lessen the tax bite.

And, in reality, most of our tIRA contributions were at the 25% bracket with some even at 28%. So, worst case, we break even on the tax hit. So, while paying higher taxes is not something we WANT to do, it ultimately means we won the game.

 

[RunningBum]

One of the things I've learned here is that once you've had a lot of years of income, an extra year does very little to improve your SS benefits. Especially if you've got 35 years in already, and are just replacing a lower year with a higher one. I think you've already figured that out with the small $21/month bump.


I think it's wrong to just look at that though. Look at the whole picture of what another year of income does to your overall position. Essentially all income after taxes and business expenses gets added to your nest egg, since if you aren't working you are spending down some of your nest egg. I guess being self-employed probably means your health insurance situation isn't changing, and you aren't losing any other benefits because you were giving them to yourself, perhaps with tax benefits.


Compare all that to being free of work and having more time in retirement.